Food vs Coffee Gross Profit Margin
To know what your inventory gross profit margin is, is a vitally important part of operating a successful food business. However, is your food margin being inflated by your coffee sales?
“What do you mean?” I hear you say!
Well, we all know that coffee has a higher inventory gross profit margin than food. Your coffee margin should be in the region of 80% and your food should be around 70% (ballpark, as it can fluctuate depending on the type of food business you have and the sales mix you operate).
But when it comes to calculating your profit margin, do you separate the sales of food from the sales from coffee? If not, then you should, as counting them together is masking your real gross margin.
All too often it happens that a business which has a high percentage of coffee sales (over 20%) includes these coffee sales in with the food sales – this is incorrect! While in the short term, it boosts your margin, but in the long term it is incorrectly inflating your inventory gross profit margin. Separate the two and run a separate percentage for both – this gives a truer percentage of your overall operating margin.
For example, Coffee has a margin of 80%, food has a margin of 70% (approximately).
In the table below, Figure 1, you can see that the overall Inventory Gross Profit percentage is at an acceptable 70.9%. Above the expected 70%. Great… but is it?
On a closer look you can see that the food GP % is only at 67.4%. Not at 70%. The overall GP is being inflated by a higher GP % on coffee.
In Figure 2 we have increased the food GP % to the required 70%. The overall difference is a full 2% in margin. Worth managing more closely now?
The old adage “whats measured is managed” is so true when it comes to the management of your food and coffee gross profit margins.
Its not a big deal to separate the two figures, just ensure that the inventory and purchases for both food and coffee are accounted for separately.